Freakonomics: Do wine experts or prices matter?

TEXT OF INTERVIEW

Kai Ryssdal: Time now for some Freakonomics Radio. Every couple of weeks, we talk to Stephen Dubner, co-author of the books and the blog of the same name. It is, of course, the hidden side of everything. Dubner, welcome back.

Stephen Dubner: Thanks Kai. I bring a riddle with me today for you.

Ryssdal: Don't do that! I don't like tests.

DUBNER: I know you love 'em. You've got a great record so far.

Ryssdal: All right.

DUBNER: There's a huge global market out there, one that gets particularly exciting this time of year -- the holidays. It's really one simple product with hundreds of thousands of variations, represents about $30 billion a year in U.S. spending -- that's $100 for every man and woman and child, even though children don't use this product. Do you have any idea what I'm talking about?

Ryssdal: Uh, I have no clue, because right up until the whole children-don't-use-it thing, I was going to say gift wrapping, because there's just a lot of that. But no, I don't know.

DUBNER: That would have been a terrible guess anyway.

Ryssdal: Thanks for coming on the show, Dubner.

Dubner: Let me give you another clue.

Music, people talking

Ryssdal: All right. Oh, I know what it is. It's holiday parties, right? So the holiday party industry is booming?

DUBNER: Even smaller: just the wine. It's the quintessential holiday gift, right? I'm guessing you've got a party or two to go to yourself this year?

Ryssdal: I'm actually not going, the party's coming to me. I am, believe it or not, hosting the Marketplace Christmas party this year, somehow.

DUBNER: Good God. So you in particular really need to pay attention to what I'm going to talk about today. Because what you want to do is you want to serve the right wine -- people like it but it doesn't bankrupt you, right, that's the problem?

Ryssdal: Basically yes.

DUBNER: So you've got two signals to help you make this choice. The first is price; we assume the more expensive wine will taste better than the cheaper. And the second signal is critical opinion; we listen to what experts about wine have to say, right?

Ryssdal: Yes, and of course, the theory being that the more expensive the wine is, the better the critics will think of it, right?

DUBNER: That is a wonderful theory and sometimes it works -- in wine, it doesn't. Now there's a group of academic researchers that publishes the Journal of Wine Economics. I am not making this up. And there's a paper called, "Do More Expensive Wines Taste Better?" It's based on a big study of 6,000 blind tastings, all kinds of people, all kinds of price points of wine. The conclusion was this: people enjoyed the more expensive wines slightly less.

So here's the lead researcher, Robin Goldstein:

Robin Goldstein: So even among the experts, there are some people who were very bad at this test and others who were very good, and also among not-experts, there was a wide range of performance.

Ryssdal: Which is the academician's way of saying, wide range of performance means nobody really got the answer right.

DUBNER: That's right. Even the experts. The experts were a little bit better, but still pretty bad. There's another study that makes wine experts look even worse. It was a study of wine competitions, where a winemaker will enter a bottle to try to get a gold medal and it turns out that only one in 10 expert judges gave the same wine the same rating when they tasted it twice. So it turns out they're just wildly subjective, even the most learned people.

Ryssdal: And the business case here, of course, is that better points mean more wine sales, which means more money for the winemakers and the retailers.

DUBNER: Much more. A lot of dollars involved based on what wine critics say. You've heard of Robert Parker, I'm assuming.

Ryssdal: Yeah, he's the 100-points is the best bottle of wine ever; he's the points guy.

DUBNER: Right, the Parker Point Scale, 100-point scale. A lot of critics now use it. It's incredibly influential to the market.

Ryssdal: So here's the big money question, though, Dubner: if these guys are so subjective, these wine experts are so subjective, and there's so much money involved, why do we listen to the experts?

DUBNER: Because we are human beings. And we need shortcuts. We can't do all the research about everything ourselves, so we rely on experts. The problem is, they are subjective and they are fallible. I talked to Orley Ashenfelter, who's one of the wine economists who's an economist at Princeton, and he's thought about all the different kinds of ratings from all different kinds of experts. Take for instance, the financial crisis:

Orley Ashenfelter: I mean, S&P, Moody's, Fitch's -- these people all rated securities that apparently completely tanked. So there's obviously something in the demand for the expertise, the imprimatur, which is not really about the fact that they do a good job.

Ryssdal: So two things, you ready?

DUBNER: I'm ready.

Ryssdal: One is that I thought it was imprimatur [pronounced differently], but that's neither here nor there.

DUBNER: He's at Princeton, so he probably knows better than you or me. You and I.

Ryssdal: The other substantive question is, what am I supposed to do when I go into the wine shop to shop for the Marketplace holiday party? Do I go for a nice label or do I go big prices?

DUBNER: You could follow the lead of my Freakonomics friend and co-author, Steve Levitt. He's solved the problem for you; he happens also to be an economist at the University of Chicago.

Steven Levitt: My approach to buying wine for gifts is simple: I go in the store, and I look for the label that looks the most expensive of anything in the store. And I make sure it costs less than $15, and if it does, then I buy it.

DUBNER: Unless Levitt is going to a party with a bunch of wine snobs -- which knowing Levitt, I can assure you he is not -- no one will be the worst off except for the folks who make and sell expensive wine.

Ryssdal: Stephen Dubner, our Freakonomics radio correspondent. There is more on his website, freakonomicsradio.com. Dubner, we'll see ya.